Solving for Success in a Changing Economy

2022 came with many economic challenges: stringent lockdowns in China, European conflict, port backlogs, high inflation, rising interest rates, markets melting down, and cryptocurrency scandals, to name a few. Despite everything thrown at the global economy last year, we still ended up in a pretty good place, with most world economies continuing to grow. Here are a few things we can expect in the months ahead.

Demographic changes in the workforce, the pandemic accelerating early retirement (to an extent), and changes in immigration policy have limited the ability of the labor supply to grow as fast as labor demand, which has been pushing up workers' wages. We're starting to see wage growth soften even as the labor market remains tight, so if we go through some labor disruption this year or next, there should be more options for people seeking employment.

The COVID-19 pandemic and related business shutdowns caused people to spend more time at home, ultimately leading many to desire larger spaces, creating a boom in the housing market. When the federal government cut interest rates, housing prices increased at an unsustainable level. With inflation decelerating, we expect to see a readjustment in the residential housing market over the next year or two, but much of this will depend on interest rates.

 

The market for industrial real estate has never been hotter due to the advent of e-commerce and mobile commerce, and warehouses are in high demand. Physical retail centers have held up much better than most would think and are evolving to make their stores and warehouses complement each other. Apartment complexes also continue to do well, thanks to a consistent demand for rental housing.

 

Commercial office spaces are still in question. The way we work has changed, with many organizations embracing hybrid schedules. Office buildings aren't disappearing, but we are likely to see less efficient or underused areas of offices be repurposed into more beneficial spaces.

When asked about hotspots regarding the global economy, Severino believes it is important to watch what is happening in Europe as high demand, the pandemic, and the conflict between Russia and Ukraine have led to an energy crisis. China is another hotspot to watch as they abandon their zero COVID policy, which has led to supply chain disruptions, trade investment disruptions, and companies collapsing. While some economies are slowing down, such as Europe and North America, we can likely change paths, especially if China comes back as a massive force of economic growth after the COVID-19 lockdowns end.

While we aren't where we were pre-pandemic, the fun part of the economy seems back: Consumers are going to restaurants, bars, traveling, and taking vacations. While the global supply chain still faces disruptions, supply chain issues have improved, which we see through decreased costs and faster shipping times. 

As the federal government tries to curb inflation, Severino anticipates they will leave interest rates somewhere north of 5% for a period to make sure that inflation is migrating downward. Having a divided Congress will make it more challenging to pass spending legislation and make other progress over the next two years, so if there is a slowing in the economy, we may not have the benefit of fiscal policy we saw in the past.

While corporations are not investing as much in physical structures, there's a lot of investment in equipment and intellectual property. We still have an innovative and productive economy, which portends good things about the economy in the medium to long term future.

With cryptocurrency increasing in popularity among younger generations, it's important to be careful of possible stolen tokens and fraud. The market is still unregulated, and unlike stocks, the cons of investing in crypto can be worse than the pros.

The narrative surrounding our economy has gotten awfully pessimistic, and while we are in an economic downturn, we're in a much stronger position compared to the 2007-2009 recession.

 

Data shows that household balance sheets are in a good place, partially due to wage increases and the lingering effects of government stimulus spending. Corporate balance sheets are in favorable positions; they aren't overextended with debt, and while some have seen profits decline for the past few years, corporate profits are still near record-level highs. While we can't rule out the possibility of a recession this year, data indicates that it would be far out.